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In: Finance

Jane and John Boilermaker wish to purchase a 40 acre tract of land valued at $1,900...

  1. Jane and John Boilermaker wish to purchase a 40 acre tract of land valued at $1,900 per acre. The lender charges a $500 loan application fee and $250 for a real estate appraisal. Fees totaling 1% of the loan amount are also required to complete the loan. The fees can be added to the original loan amount. The lender requires $24,000 initial equity for this loan. The contractual interest rate is 7%. The fixed annual payments are based on a 25 year amortization period. The interest is calculated using the remaining balance method.

  1. What is the effective annual interest rate for the loan?

  1. What is the effective annual interest rate of the loan if semiannual payments are made? Explain the difference from answer a.
  1. Assume the lender has given John and Jane the option of reducing (buying down) the contractual rate from 7.0% to 6.8% by paying a fee of 1% of the loan amount. This amount can be added to the loan. If John and Jane have a 10 year planning horizon and a 10% cost of capital, should they buy down the interest rate? (Note: disregard potential changes in income taxes.)

Solutions

Expert Solution

Buying down interest rate is not viable as it is not outweigh the first plan.

jeff jeffy answered 1 year ago
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